Rate rise prediction brought forward to early 2018

A leading think-tank has brought forward its projection for an interest rate increase by more than a year.

The National Institute for Economic and Social Research (NIESR) said it now believes the Bank of England will introduce its first interest rate rise in more than 11 years in the first quarter of next year.

However, it noted that this “should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy after the 2016 EU referendum”.

Economic growth forecast

The latest research from NIESR believes 2017 will be the trough for GDP growth at 1.7%, having noted that the economy slowed each year since 2014.

But it predicts only a “modest recovery that takes economic growth to a level that is close to potential”, as growth reaches 1.9% next year.

NIESR also suggests there will be two years of further financial pain for households with inflation expected to increase to 3% by the end of the year before finally slipping back to the target of 2% late in 2019.

“Our forecast for Consumer Prices Index (CPI) inflation however, is lower compared with that in our May review because the outturn for the second quarter was weaker than our forecast,” it added.

Fiscal deficit

Overall, it predicted that the fiscal deficit would be eliminated in 2022 with the debt-to-GDP ratio peaking in 2018/19.

However, the NIESR cautioned that its forecasts were based on a return to meaningful productivity growth from 2018 and that if this did not materialise it was likely to result in poorer economic performance than its expectation.